Forex trading strategy 11: Pendulum strategy

Forex trading strategy: Pendulum strategy

In the previous strategy, we explored a technique that helps us to anticipate a range with the help of the stochastic indicator and also trade it in the early stages of formation. The pendulum strategy comes to the rescue in the later stages of a range formation. In other words, we can still trade the range after it has been formed.
You don’t need any indicators for this strategy, and you can use it to trade a range for as long as the market is swinging back and forth within the range like a pendulum.
Time Frame
The pendulum method works with the hourly (H1) or 4-hourly (H4) chart.
This means that each candle on the chart represents 1 hour or 4 hours of price movement respectively.
Indicators

No indicators are used for this strategy.

Currency Pairs

This strategy is suitable for all currency pairs listed on the broker’s
platform, especially the seven major currency pairs of:

EUR/USD
USD/JPY
GBP/USD
USD/CHF
USD/CAD
AUD/USD
NZD/USD

Strategy Concept

The pendulum in motion swings back and forth because the force of gravity is pulling it back to the vertical position every time it swings away from it. The pendulum reaches an optimal height before it starts to fall back. However, if the swinging force is too great, the string holding the
pendulum will snap, and the pendulum will fly off.
The ranging market acts in a similar fashion to the pendulum. Every time prices pull away from the midpoint of the range toward the support or resistance, market forces will pull it back towards the mid-point of the range. However, when the market gathers enough momentum, prices will
break the support or resistance of the range and move into a trend.
In this strategy, we wait for the pendulum to reach its optimal height and fall before we enter the trade. We do this by executing a trade only at the 10% mark after prices turn back from either support or resistance. The first target is set at the 50% mark of the range, and the second target is set at the 90% mark of the range.

Long Trade Setup

We use the AUD/USD on the H4 time frame to illustrate a long trade. Here
are the steps to execute the pendulum strategy for long:

1. Identify the resistance and support. Take note when the price goesback to the support again. (See Figure 8.35.)
2. In this example, the range is 269 pips; 10% of the range is 27 pips.
Enter when the price bounces 27 pips above the support (1.0101). (See Figure 8.36.)
3. The first and second profit targets are 50% and 90% of the range respectively, which are 135 pips and 243 pips above the support (1.0101).
4. Use risk to reward ratio of 1:1 to set the stop loss. (See Figure 8.37.)

FIGURE 8.35 Identify Resistance and Support - Forex trading strategy: Pendulum strategy

FIGURE 8.36 Enter When Price Bounces 27 Pips Above Support - Forex trading strategy: Pendulum strategy

Forex trading strategy: Pendulum strategy

FIGURE 8.37 Set Stop Loss and Profit Targets
From the long example in Figure 8.38:

Entry price = 1.0128
Stop loss = 1.0020
Profit target 1 = 1.0236
Profit target 2 = 1.0344

Forex trading strategy: Pendulum strategy

FIGURE 8.38 Trade Hits Profit Target
The risk for this trade is 108 pips, and the reward is 216 pips if both targets are hit. The risk to reward ratio is 1:2, which yields a tidy 6% returnif we take a 3% risk.

Short Trade Setup

We use the GBP/USD on the H4 time frame to illustrate a short trade.
Here are the steps to execute the pendulum strategy for short:

1. Identify the resistance and support. Take note when price goes back to the resistance again. (See Figure 8.39.)
2. In this example, the range is 205 pips; 10% of the range is 21 pips. Enter when the price bounces 21 pips below the resistance (1.6117). (See Figure 8.40.)
3. The first and second profit targets are 50% and 90% of the range respectively, which are 103 pips and 185 pips below the resistance (1.6117).
4. Use risk to reward ratio of 1:1 to set the stop loss. (See Figure 8.41.)

From the long example in Figure 8.42:

Entry price = 1.6096
Stop loss = 1.6178
Profit target 1 = 1.6014
Profit target 2 = 1.5932

Forex trading strategy: Pendulum strategy

FIGURE 8.39 Identify Resistance and Support

Forex trading strategy: Pendulum strategy

FIGURE 8.40 Enter When Price Bounces 21 Pips Below Resistance
The risk for this trade is 82 pips, and the reward is 164 pips if both targets are hit. The risk to reward ratio is 1:2, which yields a tidy 6% return if we take a 3% risk.

Forex trading strategy: Pendulum strategy

FIGURE 8.41 Set Stop Loss and Profit Targets

Forex trading strategy: Pendulum strategy

FIGURE 8.42 Trade Hits Profit Targets

Forex Strategy Roundup

This strategy is applicable as long as the market is swinging back and forth in a range. The power ranger strategy and the pendulum strategy work perfectly together. You can use the power ranger strategy to identify and trade the range in its early stage of formation, then apply the pendulum strategy to trade the later portion of the range.

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Forex trading strategies 10: Power Ranger Strategy

• Power Ranger Strategy Concept
– Using the common oscillator, the Stochastic to identify entry for early range trading.
• Time-frame
– H1 and above.
• Currency Pairs
– All currency pairs.
• Indicators
– Stochastic with the following settings :
– %K period = 10
– %D period = 3
– Slowing = 3
– Price field = High/Low
– MA Method = Simple
– Levels 20 and 80

CHAR WITH THE INDICATORS

• Long Trade Set-up
1. Draw an uptrend line based on a series of Higher Highs and Higher Lows.
2. On the Stochastic, look for %K and %D to go below level 20 (Oversold).
3. Determine the Support and Resistance of the range.
4. Enter when both the %K and %D is above 20 (%K is above %D).
5. Take Profit is between 50% to 75% of therange.
6. Stop Loss is at 1:1 risk-to-reward ratio and lower than the Support. If Take Profit is 50
pips, Stop Loss will be 50 pips.

Long Trade Example

Short Trade Set-up
1. Draw a downtrend line based on a series of Lower Highs and Lower Lows.
2. On the Stochastic, look for %K and %D to go above level 80 (Overbought).
3. Determine the Support and Resistance of the range.Power Ranger Strategy
4. Enter when both the %K and %D is below 80 (%K is below %D).
5. Take Profit is between 50% to 75% of the range.
6. Stop Loss is at 1:1 risk-to-reward ratio and higher than the Resistance. If Take Profit is
50 pips, Stop Loss will be 50 pips.

Short Trade Example

The Challenger
• Long Trade Set-up
1. After the “Power Ranger” Long trade hits Take Profit and the price goes back to the Support again.
2. Enter after price bounces above 10% of the range.
3. Take Profit is 50% of the range.The Challenger
4. Stop Loss is at 1:1 risk-to-reward ratio and lower than the Support. If Take Profit is 70 pips, Stop Loss will be 70 pips.

Long Trade Example

The Challenger
• Short Trade Set-up
1. After the “Power Ranger” Short trade hits Take Profit and the price goes back to the Resistance again.
2. Enter after price bounces below 10% of the range.
3. Take Profit is 50% of the range.
4. Stop Loss is at 1:1 risk-to-reward ratio and higher than the Resistance. If Take Profit is
70 pips, Stop Loss will be 70 pips.

Short Trade Example

Let’s Be Power Rangers!

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Forex strategy 9: Fifth element strategy

FIFTH ELEMENT STRATYGY

“I am using a wonderful strategy, but I have to constantly monitor the market in order not to miss a trade.” “Ah! I missed a trade again.” “According to my strategy, it looks like there may be a trade setup soon, but I have a movie date in the next hour. What should I do?”
Do these scenarios sound familiar to you?
Wouldn’t it be nice to have a strategy that actually prompts you when momentum of the market has switched to a new trend? In fact, the beauty of the fifth element strategy is that it tells you ahead of time when the entry price will be.
This is the third and final trend strategy in this segment. Let’s find out what’s so special about it.

Time Frame

The fifth element strategy works with the hourly (H1) or 4-hourly (H4) chart. This means that each candle on the chart represents 1 hour or 4 hours of price movement respectively.

Indicators

We use this indicator for this strategy:

Moving average convergence divergence (MACD) with default settings:
a. Fast EMA: 12
b. Slow EMA: 26
c. MACD SMA: 9
d. Apply to close.

Currency Pairs

This strategy is suitable for all currency pairs listed on the broker’s platform, especially the seven major currency pairs of:

EUR/USD
USD/JPY
GBP/USD
USD/CHF
USD/CAD
AUD/USD
NZD/USD

Strategy Concept

The MACD histogram indicates the direction and momentum of the market. When the MACD histogram switches from negative to positive, this indicates a possible upward shift in momentum. We wait for five positive bars on the histogram to confirm the momentum before entering a long trade on the fifth bar. No prizes for guessing why the name of this strategy
is called the fifth element!
When the MACD histogram switches from positive to negative, this indicates a possible downward shift in momentum. We wait for five negative bars of the histogram to confirm the momentum before entering a short trade on the fifth bar.

Long Trade Setup

We use the AUD/USD on the H4 time frame to illustrate a long trade. Here are the steps to execute the fifth element strategy for long:

1. Wait for the MACD histogram to go from negative (<0) to positive (>0). (See Figure 8.18.)
2. Wait for four positive bars to form on the histogram before going long on the opening candle of the fifth histogram. (See Figure 8.19.)
3. Set the stop loss at the last low of the histogram.
4. The trade will have two profit targets with risk to reward ratios of 1:1 and 1:2 respectively. (See Figure 8.20.)

From the long example in Figure 8.21:

Entry price = 1.0300
Stop loss = 1.0150
Profit target 1 =1.0450
Profit target 2 = 1.0600

The risk for this trade is 150 pips, and the reward is 300 pips if both targets are hit. The risk to reward ratio is 1:2, which yields a tidy 6% return if we take a 3% risk.

Short Trade Setup

We use the EUR/USD on the H4 time frame to illustrate a short trade.
Here are the steps to execute the fifth element strategy for short:

1. Wait for the MACD histogram to go from positive (<0) to negative (>0). (See Figure 8.22.)

2. Wait for four negative bars of the histogram before going short on the opening candle of the fifth histogram. (See Figure 8.23.)
3. Set the stop loss at the last high of the histogram.
4. The trade will have two profit targets with risk to reward ratios of 1:1 and 1:2 respectively. (See Figure 8.24.)

From the short example in Figure 8.25:

Entry price = 1.3400
Stop loss = 1.3547
Profit target 1 = 1.3253
Profit target 2 = 1.3106

The risk for this trade is 147 pips, and the reward is 294 pips if both targets are hit. The risk to reward ratio is 1:2, which yields a tidy 6% return if we take a 3% risk.

Strategy Roundup

The fifth element is an excellent swing trading strategy for beginners. The beauty of this strategy is that it does not require you to monitor the market for a long time. It also signals you well in advance as to when the entry of a trade is about to take place. As you know by now, the entry takes place on the fifth bar after the MACD histogram switches from negative to positive
or from positive to negative.
Five bars of the histogram is equivalent to 5 hours on the H1 time frame or 20 hours on the H4 time frame. This means you need to monitor the market only on a 5-hourly basis if you are trading the H1 time frame or a 20-hourly basis if you are trading the H4 time frame. Knowing that the entry is always on the fifth bar of the histogram means that you are in total
control of your time.
As an example, let’s say that you are trading the H1 time frame. You spot the MACD histogram switching from negative to positive. You glance at your watch and see that the time is 2:15 P.M.
The current bar is the first bar, and it corresponds to the 2 P.M. candle.
What would be the likely time that you will enter the trade? The answer is 6 P.M., because that would be the start of the candle that corresponds to the fifth bar of the histogram. You have ample time to catch a two-hour movie before heading home again to prepare for the trade!

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